ECOSISTEMA INVERSOR PARA EL SECTOR TECNOLOGÍA MUMBAI JUNIO 2017 Consulado General y Centro de Promoción de la República Argentina -Mumbai- [email protected] The Investment Ecosystem for the Technology Sector in India CGMUM 1 INDEX Topic Page No I. INTRODUCTION 3 II. LEGAL FRAMEWORK 4 a. Identification of Best Practices 4 b. Public & Private Support Incentives 6 1. Startup India, Standup India 6 2. Digital India 7 c. Requirements to start a company 7 d. Visa Validity & Residency 9 III. TECHNOLOGY SECTOR 11 a. Principal Sub‐segments 11 b. Potential Growth in sub segments 11 c. Size of the Sector 13 IV. KEY PLAYERS 14 a. Investors – Venture Capital & Private Equity Companies 14 b. Angel Investors 22 c. Industry Bodies, Facilitators & Networks 23 1. CII 23 2. Incubators & Accelerators 24 3. Tech Investment Roundup 25 V. OTHER RELEVANT ACTORS 26 a. Universities 26 b. Statutory Academic Tie‐ups 27 c. Argentine companies in India 28 VI. EVENTS & EXHIBITIONS 29 VII. BIBLIOGRAPHY 31 2 I ‐ Introduction India is today undertaking a fundamental shift towards start‐up friendly policies and a business‐ friendly environment. To do so, India also needs to nurture its entrepreneurial ecosystem to create more start‐ups as well as opportunities for its vast young population to find employment. To address this challenge, various private and public sector associations have focused on building a robust start‐up ecosystem in the country with the patronage of the National and State Governments, and assistance of industry and other relevant stakeholders. India is the world’s 3rd largest start‐up hub after the US and the UK. The average age of a founder is 28 years. The average number of new tech startups have moved from 480 in 2010 to 800 in 2015, and expected to increase to 2,000 in 2020. Overall, the total Tech startups are expected to increase to 11,500 in 2020 from 4,300 in 2015. The ecosystem has grown tremendously in terms of angel investors and corporates getting interested. About 80% of investment focuses on technology and of that, 80% is especially focused on mobile solutions, and most of that goes to enterprises based in cities like Bangalore and Mumbai. Likewise, for incubation and mentoring, most of the support and advice goes to the enterprises within the technology sector. The startup ecosystem continues to be concentrated in regions such as the NCR, Bangalore and Mumbai which together contributed to 87 percent of total investment value and 84 percent of total investment volume in 2015. However, technology companies are not great employment generators and this is a major issue. Mobile and technology startups are not going to create those livelihoods because their business models are often directly or indirectly looking to reduce the number of employees to increase efficiency and revenue. Total funding in technology startups were USD 2.2 billion in 2014 and it is expected to reach USD 4.9 billion in 2016 as per a NASSCOM study on tech and digital startups. At the same time, the number of funds investing in India grew 40% between 2013‐2014 (from 338 to 10436 funds), and half of those funds were investing in India for the first time. 3 II. LEGAL FRAMEWORK a. Identification of Best Practices Best practices in relation to Indian start‐ups encompasses much more than just legal documents and financing. Generally, the right direction is one where a foreign entity has more clarity, better focus, and an enhanced vision that builds a more robust company. 1. Join forces with knowledgeable local investors: Foreign investors or founders need to be prepared to tackle complex questions, often spontaneously. Having an experienced investor by your side can help a founder respond more effectively to important decisions and inevitable challenges. While you don’t want your investor to necessarily be overly involved in the minutia of daily operations, having access to a knowledgeable investor can be a valuable resource for dealing with strategic issues and any type of Consultancy services one may need. 2. Compliance consciousness: By not cutting corners and demonstrating a commitment to meeting minimum compliance standards ‐ possibly even reaching beyond compliance – an investor can inspire confidence, trust quotient and appear more professional. 3. Self‐discipline: Be prudent about your expenditures – investors with a lot of accessible capital at their fingertips can make some imprudent spending decisions “in the best interest of business.” So, look for value and distinguish between ‘needs’ and ‘wants.’ Be cautious with your time – time management is more crucial than you realize. You don’t need to attend every event, accept every lunch invitation, or even look at every invitation as an opportunity. 4. A solid term sheet: Along with your letter of intent, the term sheet facilitates an understanding between founders and investors as to what’s expected regarding debt vs. equity considerations, liquidation preference, future financing and valuation, and what the parties can anticipate in the event that the company is acquired prior to a loan’s maturity. While a term sheet is more than just a handshake, it is still not a financing commitment. It ‐ along with your negotiation ‐ sets a tone, so make it a positive one. 5. The right financing structure: In order to sell equity, you need to know the company’s valuation. Since figuring out a startup’s value is usually impossible (it’s just starting up, so it typically doesn’t have any value in the beginning ‐ no assets, revenue or customers), determining equity would be arbitrary. It would also likely impair a more fair assessment later, after the company does achieve positive cash flow. * Convertible debt notes were innovated to enable a startup without a valuation to raise capital quickly and less expensively than equity, and as a feasible alternative to obtaining an 4 ordinary bank loan. A convertible debt instrument is a loan from an early round private investor (angels or VCs). VCs and angel investors are high net worth individuals who offer startups private loans with the expectation that at some point later down the road (e.g., 1‐2 years), the debt changes into equity ownership (stock) in the company. They were pioneered to allow founders to get a quick loan from private investors, in exchange for promising to repay those investors with equity (stock) at a later time when equity could be determined ‐ normally, after a Series A funding round. In other words, company founders get fairly quick, inexpensive (low interest) cash, which they repay with ownership equity at maturity. 6. A sensible business structure: While incorporating your new company, or changing structures in an existing one, engage a knowledgeable attorney to help you decide on where and how to incorporate. Another important consideration is to avoid being top heavy with too many co‐founders. 7. Build a strong team: Hire key recruits who can offer your company not only product and process expertise, but a different way of thinking. You aren’t committing to adopting their views as much as incorporating their ability to push your team’s thinking in new directions. * Design thinking is a problem‐solving technique that’s fundamentally dissimilar to traditional, linear approaches. Instead, you start with a goal in mind rather than the notion of solving a problem. Traditional analytical thinking limits creativity and the explosion of ideas that can result from a nonjudgmental brainstorming session. Design thinking allows for unlocking a solution or inviting a critical ‘but‐for’ tweak that takes the company or a product in a direction that couldn’t otherwise occur if your team was constrained by self‐imposed restraints. Educate your investor about your team‐building and problem solving approaches. It can distinguish you from your competition. 8. Understand the challenges: High lending rates and corporate tax rates pose significant roadblocks for the industry’s progress. Corporate tax rates as high as 34 percent affect the ease of doing business adversely. Conversely, tax friendly policies, absence of capital or dividend taxes and benefits to startups headquartered in Singapore from their 70 comprehensive Double Taxation Avoidance Agreements (DTAA), for instance, are initiatives which provide a taxation environment conducive to establishing startups. According to the World Bank Doing Business in 2016 report, India’s position has improved from 164 to 155 in terms of starting a business. This ascertains that India has become a better place for a business inception. However, beginning a venture is still a tedious process in India and it takes 29 days and over 12 procedures to initiate a business. For comparison, in countries such as Israel, the number of days is virtually half as that of India and the scenario is better for other developed countries such as Singapore. In these developed countries, it takes as low as 2 days to begin a business. In addition to taking corrective 5 measures in this direction, the tone also needs to be set right for other critical aspects such as lending rate and spend on research and development. The lending rate is virtually thrice as that of developed economies such as the United States and this calls for stringent action. The complicated tax regime of India, with each state levying their own sales tax and having separate procedures for licenses and taxation, makes expanding across India a cumbersome process. The proposed Goods and Services Tax (GST) common across the country, therefore, holds substantial promise to ease taxation issues for business Angel investors, venture capitalists and private equity firms have though provided respite in this regard, making the industry progress at a good pace over the years. Furthermore, with the enthusiasm of the government visible through various initiatives such as the Digital India campaign, Make in India and the recent all‐inclusive Action plan to boost startups, the business environment would certainly become conducive to invest and develop.